When you need a new faucet, do you think first of a manufacturer — maybe Delta or Kohler — or of a retailer, such as Home Depot? In recent years, as giant retailers have taken an ever-larger share of markets worldwide, consumers have increasingly moved their loyalty from manufacturers to retailers — and to those retailers’ private brands.
The shift, says Jan-Benedict Steenkamp, C. Knox Massey Distinguished Professor of Marketing and area chair of marketing at UNC Kenan-Flagler (pictured left), has important implications for consumers, retailers and manufacturers alike.
Steenkamp and Nirmalya Kumar of the London Business School recently co-wrote a groundbreaking book that analyzes such retailer strategies as copycat products and multi-tiered and premium store brands and recommends ways manufacturers can address them. Harvard Business School Press published “Private Label Strategy: How to Meet the Store Brand Challenge” in February, and the book has been hailed in the Financial Times, The Los Angeles Times, Advertising Age and elsewhere.
Steenkamp and Kumar provide in-depth case studies from best-in-class retailers around the world. They examine private labels in a number of sectors, including packaged goods, apparel, books, pharmaceuticals, financial products, home furnishings and home improvement. In doing so, they drew on the academic research and consulting work each has done; Steenkamp himself has worked with such companies as Procter & Gamble, Kraft, Unilever, Reckitt Benckiser, Zurich Financial Services, Sara Lee and Johnson & Johnson, and he heads the global marketing strategy study center AiMark.
Private labels, they point out, have been around a long time. In the United States, for example, A&P’s Eight O’Clock Coffee brand is more than a century old. Manufacturer brands still dominate the market in this and many other countries, but they’re rapidly losing ground. Growth of private labels is particularly strong in emerging markets, albeit from a low basis.
Steenkamp says that private labels have three advantages to retailers: they can build loyalty to the store; they’re often, though not always, more profitable for the retailer than national brands; and they put pressure on manufacturers to grant more favorable margins to the retailer. Thanks to their growing size and sophistication, retailers not only have the motivation to put forward better private label packages, they also have the capacity.
Steenkamp is quick to insist that there’s no simple way for manufacturers to recapture their strength in the market. “If you want to have a guru answer, don’t expect it from us, because we’d rather be honest,” he said. “But a number of strategies we developed will increase their chances of success. One of the things manufacturers need to do is to come up with new products. In categories where brand manufacturers innovate a lot, private labels are less successful.”
Manufacturers can also fight selectively, he recommends. “Even large companies don’t have the money anymore to support all their hundreds of brands. Focus your marketing strategies on the stronger brands and get rid of the rest.”
In addition, manufacturers need to focus on quality. “In more and more categories, manufacturers have gone easy on the continuous quality improvement trajectory,” he says. When that happens, “private labels overtake national brands and may even offer better quality, and for a lower price.”
For all the challenges they present to manufacturers, private labels have proven an enormous boon for the consumer, he says. “The consumer has more choice than before. Private labels are often better value for the money. And because of the competition, manufacturer brands have to hold their prices in line.”